It is first important to note that there is contention around this subject and as such, much disagreement on the definitions. For an example of this, one need not look further than the below resources which arrive at contrasting conclusions:
Digital vs Virtual Currencies
The above CoinDesk article posits an easy way to understand the difference: by placing the word ‘economy’ as a suffix.
Digital economy: As such, this would describe all businesses, people and services working in a digital manner. Whether these are businesses operating solely online, members of the gig economy or app building services; each look to provide an offering with digital at its heart.
Virtual economy: In comparison, the virtual economy is the ‘un-real’. Whether this is the micro-economies within Farmville, communities in World of Warcraft or (in a few years to come) the services provided within virtual reality.
Therefore, the difference between digital currencies and virtual currencies can be understood in a similar fashion: where digital currencies are a non-physical representation of traditional fiat money, virtual currencies represent a truly online asset which does not has value other than in its virtual world.
Some notable examples of virtual currency are Pokécoins in the game Pokémon GO!; Facebook credits for advertising and in-platform games; and K Stars within the Kardashian Game app. In each of these examples, traditional fiat currency (in digital form) must be exchanged for the virtual currency and what’s notable is that this is a one-way flow e.g there is no easy method to exchange your Pokécoins back to traditional fiat currency. In addition, a Facebook credit cannot be used to buy a loaf of bread and nor can K Stars be used to purchase a house – their use and value reside within the platform they have been created in.
In comparison, digital currency is a digital representation of a physical asset e.g money in your PayPal wallet, currency on Revolut and the money in your HSBC online account which you use to purchase some K Stars.
Another key distinction is the level of centralisation and ownership. Where digital currency is owned and controlled by central banks and governments, virtual currency is decentralised and can be created by any corporate e.g Facebook, app makers, individuals, and thus falls under a bespoke set of creation and usage rules, outside of national fiscal policy.
However, this distinction starts to buckle once more abstract concepts such as bitcoin, ether, and litecoin, the cryptocurrencies, are introduced.
(For a beginner’s guide to cryptocurrencies – look here)
Many will be familiar with the first cryptocurrency, Bitcoin (BTC), which has a market cap of c.$40bn and sees 24h trading volumes of c.£1bn, some may also be familiar with Ether (ETH), Ripple (XRP), Litecoin (LTC) and Ethereum Classic (ETC) which complete the top 5 of cryptocurrencies by market cap. This nascent technology was born in the inaugural 2008 whitepaper from Bitcoin’s anonymous creator Santoshi Nakamoto (pen name) and which laid the foundations of blockchain technology.
In the 9 years since, a total of 986 cryptocurrencies have been created and the knowledge, awareness and use of cryptocurrencies has grown exponentially. However, due to a lack of regulation and piecemeal approach by national governments, cryptocurrencies currently exist in a void between virtual and digital.
The difficulty with categorising a cryptocurrency as either a virtual or digital currency is that it holds similarities with both:
- In-line with a virtual currency, it is not pegged to an underlying fiat asset
- However, like a digital currency it can be used to purchase real world goods, and the number of retailers and corporates which now accept Bitcoin is growing. However, it is worth noting that when it originated, Bitcoin drew attention from only the computer geeks and basement techies thus pushing it towards virtual currency status. However, in the years since, its acceptance by mainstream businesses has brought it out from being a niche asset and into cross-platform/ cross-market application thus moving it towards digital currency status.
- Like a virtual currency, it is decentralised and not controlled or created by a central bank or government
- But similar to a digital currency it is not confined to a specific platform or application
As such, many struggle to define it as either a virtual currency or a digital currency. However, as Bitcoin, ether, litecoin etc begin to mature and establish themselves; it may be time to define cryptocurrencies as their own distinct asset class instead of attempting to categorise them within existing non-fiat framework. In addition, and in the spirit of ensuring correct classifications are provided from the outset – the sub-category of tokens should also be listed as distinct.
Tokens can be understood as a subset of cryptocurrencies whose raison d’être is to help the functioning and maintenance of a specific platform or application. Examples of this include; Brave-coins which are used on the blockchain based internet browser Brave, Argur which users vote with in order to create a decentralised predictive market and Storj which is used to pay those who donate the used GBs on their computers as decentralised remote cloud storage.
As such, one wishing to liquidate these tokens would first have to convert them to a more standard cryptocurrency or sell directly to those wishing to purchase the token. However with 986 different cryptocurrencies/tokens, finding someone who is interested in buying your obscure token may be more difficult than exchanging to BTC.
As such, where cryptocurrencies can be seen to function closer to digital currency, tokens should be seen to function closer to virtual currencies and their position within the wider variety of non-fiat currencies can be understood with the below graphic:
In-line with the above, digital currencies can be understood to be non-physical representations of fiat currency. Virtual currency can then be understood as an online asset with no underlying physical representation, and cryptocurrencies should be understood, distinct from tokens, as a cryptographic non-physical asset which sits in-between the digital and the virtual as an exchangeable, unit of account which is a store of value.
Two New Blockchain ETFs, So What?
With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.
On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.
What are They?
BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.
However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”
So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.
Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company. That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.
For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.
Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed. The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.
Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
Read more on Cryptocurrencies:
Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
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